Wednesday, November 26, 2014

While 2014 isn't quite over, we thought it would be useful to share a few things we've learned from our utility company customers this year.

1. Cost flow models are the real culprits.
When we're engaged to audit SAP FERC processes, we sometimes find that a utility's core challenge is not regulatory accounting itself, but rather its larger cost flow model. Utilities that have been on SAP Financials for a decade or more often have cost flows that are too complex, too long, or otherwise ill-suited to support both the fine details required for rate cases, and the high-level summarization required for effective budgeting. Simplifying those legacy cost flow models to support modern internal and external reporting is usually Step One for these customers.

2. Payroll burdens aren't as transparent as they could be.
Utilities that charge "bundled" labor rates to orders — i.e., fully loaded with labor, allocated costs of employee benefits, and the employer portion of payroll taxes — lose the identity of the burdens when combined with long and complex cost flows. This makes compliance with FERC accounting regulations far more difficult, because the more secondary cost movements in a cost flow model, the less transparent the labor burdens become. The traditional FI-centric FERC solution and its flow of costs trace program attempts to keep track of those burdens as they move from senders to receivers, but this approach has a price: FERC and CO results of operations don't match. And that leads us to take-away #3...

3. FERC and CO don't match, and that's a problem.
We've talked about this many times before, and it's worth repeating: FI-based FERC models just don't work as well as CO-centric approaches in today's environment. Twenty years ago, when we thought that regulation would be phased out, it was entirely reasonable for FERC accounts to be based on FI documents alone. But in today's world, in which CO has such rich cost detail, there is no reason to tolerate painful FERC-CO reconciling differences any longer. More utilities are recognizing that "one version of the truth" can be more than just a marketing catch-phrase by adopting a CO-centric model in which both primary and secondary costs support FERC balances.

4. Regulatory accounting is under-appreciated.
This is a sensitive topic, but we've got to call it out: few people within utilities truly understand how important regulatory accounting is to their own business. Compliance with FERC, cost recovery, and rate case support are the ways in which regulated utilities make money, but this fact is often lost on staff outside the Rates department. We are starting to see more of the Finance and IT professionals who support Rates reevaluate their perspectives, recognizing that a modern FICO/FERC design must be prioritized in order to gain efficiencies, reduce costs, and take full advantage of their SAP ERP.

5. Few see value in high-speed databases — yet.
For all of the recent hoopla about in-memory databases, we're not seeing that much interest from utility Finance teams. We believe that will change in the coming year or three, when management recognizes the benefits of line item-level reporting. The sheer volume of detail that will continue to grow will mandate adoption of high-speed infrastructure. We predict that Finance won't pursue speed itself, but rather the granularity that enables "closing every day" —which will require speed.

Tuesday, November 18, 2014

Back in the mid-1990s, when utilities expected regulation would be phased out and compliance with Title 18 would no longer be necessary, we saw charging cost centers as highly convenient. This was how non-regulated companies ran, and the practice was fully embraced by utilities.

Fast forward 20 years, and the situation is quite different: regulation is actually more stringent, and utilities spanning multiple jurisdictions face even greater scrutiny. Today, while cost centers are useful on the back end for summarizing orders, comparing budget to actual, and establishing a framework for accountability, they are decidedly not effective on the front end for at least four reasons:1. Poor transparency. Charges to cost centers are less transparent than charges to work orders, and therefore make understanding, explaining, and justifying FERC-relevant costs far more difficult.

2. Increased processing time. In our experience, tracing costs from cost centers to work orders to FERC accounts doubles the processing time for the regulatory accounting close. Charging work orders directly speeds up the trace and simplifies the close.

3. Less control and flexibility. Once dollars are in a cost center, they must follow that cost center's labor. This can cause problems when below-the-line expenses are traced to above-the-line accounts. Adjustments to move non-labor from one cost center to another can inadvertently redistribute dollars to unintended FERC accounts. So while charging cost centers is convenient, it means giving up the control and flexibility inherent in charging orders directly. A utility can mitigate some of the risk by allocating cost center charges out to other receivers using assessments in Controlling. This practice, however, makes tracing costs from their origin even more complex as receivers are sometimes just other cost centers. The tracing can even become circular as the receiver may charge costs back to the original sender. This potential confusion is avoided if orders are charged directly, configured for each business transaction.

4. Unnecessary complexity. Charging cost centers makes labor rates more difficult to calculate because non-labor is also in the cost center, in amounts that vary by cost center. In contrast, excluding non-labor costs from cost centers allows labor rates to be set uniformly across cost centers for similar roles.

If you've been charging cost centers and are experiencing some or all of these challenges, contact HPC to learn how you can modernize your cost model to address today's tougher external reporting standards.

As 2014's year-end close approaches, your Accounting managers will face any number of onerous tasks: making sure suppliers are paid on time; checking budget variances and finding errors dating back to the beginning of the year; tending to year-end accounting accruals that always seem to hit in the last quarter; and taking care of last minute journal entries just in time to get to the office holiday party.

You can eliminate at least one big year-end headache — correcting mischarged orders, cost centers, and other cost objects — with the HPC Journal Entry Transfer Solution (JETS). HPC JETS is a cost adjustment application for SAP that increases the speed and integrity of cost corrections directly in SAP ECC 6.0. It's ABAP-based and looks and feels just like the SAP GUI you already know and love. When your accountants see it in action, they'll nod their heads in appreciation and say, "I wish we'd had this last year." No more reliance on lump-sum journal entries that are difficult to explain to auditors.

So, give your team a gift that will not only make this year-end less stressful, but also every monthly close thereafter more efficient and accurate: HPC JETS.

Even better, as our gift to you, all HPC JETS evergreen perpetual licenses purchased before December 31, 2014, will include up to 80 hours of HPC's consulting services at no additional charge. That amount should cover most standard implementations.

On Wednesday, November 19 from 6:30-8:00pm, HPC CEO Jerry Cavalieri will speak to San Francisco State University MBA program's BPM class about "ERP's Changing Role in the Age of Connected Everything."

Cavalieri will discuss how ERP has become foundational to the enterprise, and how businesses will adopt new BPM strategies that re-define and modernize their ERP to adapt in the social, mobile, and cloud IT architectures of today and the future. ERP is here to stay, but must adapt in ways that require more agility and flexibility than ever before. The way corporations deploy and evolve their ERP systems will determine their level of competitive advantage and profitability. The key to success is a long-range IT roadmap and careful execution to thrive and stay ahead of the competition.

The presentation will also include a demonstration of SAP ECC Financials, and time for Q&A.